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Is SaaS ERP more expensive than licensed ERP?

In a recent CRN article, Sage became the most recent vendor to create new SaaS (subscription based) pricing for their ERP products.

If resellers make more money from
SaaS in the long run, does that
mean that customers pay more?

SaaS ERP more expensive in Long Run

In the CRN article, Joe Langner, EVP for midmarket and CRM solutions at Sage was quoted “For most resellers, the recurring revenue stream eventually exceeds that up-front payment.” This suggests that for customers, SaaS is a more expensive solution in the long term than purchasing a license.
In a prior ERP Cloud News article we did a cost comparison between on-premise, hosted, and SaaS ERP solutions. This comparison validated the fact that purchasing ERP as SaaS can be more expensive in the long term. The breakeven point between SaaS and a hosted license varies according to the assumptions made regarding the cost of doing upgrades, managing the application, the cost of IT resources, maintenance payments, hardware costs, hosting costs, and several others.

For many mid-market pricing scenarios, the breakeven (point at which SaaS became more expensive) occurred before year 3 when purchasing a license and utilizing an external hosting provider. So, if you are planning to use your ERP system for less than 3 years, then SaaS makes good sense from a pricing perspective. But, most ERP solutions are installed for 7 years to 10 years or even longer.

Justifying the Higher Price

SaaS deployments may cost slightly less in years one and two – so if you have short term cash constraints, then a more expensive long term solution can be justified. But, if your company is not worried about accounting and cash flow issues and plans to use the software for the long term, then you must justify the higher long term cost of a SaaS ERP system.

SaaS versus On-Premise

Justifying SaaS over an on-premise deployment can be quite simple. If you don’t have spare IT resources, servers, OS licenses, and database licenses, then the cost of hiring or contracting with a vendor can be too high. And even if you justify the cost, it’s probably not worth the hassle of developing in-house expertise or taking on the liability of providing 24×7 operations.

SaaS versus Hosted

Hosting differs from SaaS in that customers purchase a software license and maintain responsibility for maintenance payments and software upgrades. Hardware, power, Internet connectivity, monitoring, and other services are outsourced depending on the hosting provider and the service plan. Different cloud hosting services can provide everything from bare bones virtual servers (infrastructure as a service) to a fully monitored and updated operating system (platform as a service).

In this case, the higher price of SaaS can be justified by the fact that server operations, application upgrades, and maintenance payments are included in the price. Think of SaaS pricing as including a “convenience fee” that adds up over the life of the service. A license and hosting arrangement is usually less expensive than SaaS, but the hassle associated with doing upgrades and managing the application should not be underestimated. SaaS vendors specialists in their application and provide a single point of blame if things go wrong (although behind the scenes the SaaS vendors usually outsource the hosting operations to a third party).

Conclusion

Depending on your level of expertise, company needs, and company infrastructure, SaaS may provide value or simply be a more expensive choice. There are situations where you are willing to pay for convenience and there are situations where you want to maintain control or do-it-yourself to save money.

One thing to keep in mind is that your needs, requirements, and expertise may change over time. While making your choice of SaaS or on-premise, keep your long term goals in mind, or select a vendor that allows you to move seamlessly between a SaaS and an on-premise version of their software.